Can a Virginia open-end credit lender charge an annual membership fee on top of finance charges, even if I pay my balance in full each month?

Plain-English summary

Delegate Tim Hugo asked the AG a deceptively simple question: can a Virginia lender that extends open-end credit (think credit card or revolving line) charge an annual membership fee, or is that fee really a "finance charge" that can only be charged if the borrower carries a balance?

The AG: it is not a finance charge, and the lender can charge it regardless of whether the borrower pays off the balance each cycle.

The statutory structure. Va. Code § 6.2-312(A) lets a creditor extending credit under an open-end credit plan impose "finance charges and other charges and fees at such rates and in such amounts and manner as may be agreed upon by the creditor and the obligor, if under the plan a finance charge is imposed upon the obligor if payment in full of the unpaid balance is not received at the place designated by the creditor prior to the next billing date, which shall be at least 25 days later than the prior billing date."

The italicized "if" clause is the borrower-protection: the lender's authority to impose finance charges depends on giving the borrower at least 25 days to pay off the balance without a finance charge. The statute distinguishes:

• Finance charges: assessable only if the borrower fails to pay in full by the cycle close.
• Other charges and fees: assessable without that condition.

The definition that controls. Va. Code § 6.2-100 incorporates the federal Regulation Z definition of "finance charge" (12 C.F.R. § 226.4): "the cost of consumer credit as a dollar amount. It includes any charge payable directly or indirectly by the consumer and imposed directly or indirectly by the creditor as an incident to or a condition of the extension of credit."

Critically, 12 C.F.R. § 226.4(c)(4) excludes from the definition: "[f]ees charged for participation in a credit plan, whether assessed on an annual or other periodic basis." The Federal Reserve Board's official staff commentary explains that participation fees apply "to any credit plan in which payment of a fee is a condition of access to the plan itself, but it does not apply to fees imposed separately on individual closed-end transactions. The fee may be charged on a monthly, annual, or other periodic basis; a one-time, non-recurring fee imposed at the time an account is opened is not a fee that is charged on a periodic basis and may not be treated as a participation fee."

Applying the framework to annual membership fees. Two conditions must hold:

1. The fee is a condition of access to the plan (i.e., participating in the credit plan), not a function of a specific extension of credit. An annual membership fee paid whether or not the consumer ever borrows under the card fits the bill.
2. The fee is charged on a recurring periodic basis (monthly, annual, or other periodic). One-time setup or account-opening fees do not qualify as participation fees.

When both conditions are satisfied, the fee is not a "finance charge." It is one of the "other charges and fees" Va. Code § 6.2-312 authorizes. The lender may impose it regardless of whether the borrower carries a balance from cycle to cycle.

Why this matters in practice. Many credit-card and revolving-credit products charge annual fees independent of usage. The opinion confirms that Virginia law does not classify these fees as "finance charges," which would subject them to the cycle-payment protection. The structural lesson: in consumer credit, the same dollar amount can be a "finance charge" or a "fee" depending on what triggers it. Trigger by extension of credit = finance charge. Trigger by participation in the plan = fee.

Currency note

This opinion was issued in 2013. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

Regulation Z has been amended multiple times since 2013, and various federal consumer-protection reforms (CFPB rulemaking, CARD Act provisions) have layered onto the open-end credit framework. The basic participation-fee exclusion has remained intact, but anyone relying on this opinion for a specific fee structure should verify the current regulatory text.

Common questions

What is open-end credit?
Credit extended under a plan where the borrower can make repeated transactions up to a credit limit, with the balance carried from period to period (or paid off, at the borrower's election). Credit cards, home-equity lines of credit, and certain personal lines are common examples.

What is the 25-day rule?
Va. Code § 6.2-312 requires open-end credit plans to give the borrower at least 25 days from the prior billing date to pay off the balance without a finance charge. This is the "grace period." If the borrower pays in full within the grace period, no finance charge accrues on that cycle's purchases.

Why is an annual fee different from a finance charge?
The annual fee is for access to the plan (the right to borrow under the plan). The finance charge is for actually borrowing (the cost of credit extended). Different triggers, different regulatory treatment.

Can lenders charge other fees besides annual fees?
Yes. Activation fees, late payment fees, over-limit fees, foreign transaction fees, balance transfer fees, cash advance fees, and others are common. Each is analyzed under the same framework: is it for participation/access (fee) or for extension of credit (finance charge)?

Does this affect the credit card APR?
The annual fee is not included in the periodic finance charge calculation (the APR you see on monthly statements). It is disclosed separately. Federal Truth-in-Lending disclosures require separate listing of various fees.

What about a "one-time" annual fee at account opening?
The Federal Reserve commentary makes clear: a one-time, non-recurring fee at account opening is not a "participation fee" under Regulation Z. To be a participation fee, the fee must recur on a periodic basis. So a true account-opening fee may face different regulatory treatment.

Can a Virginia lender charge whatever amount it wants?
The statute says rates and amounts are "as may be agreed upon by the creditor and the obligor." So in principle, the parties contract on the amount. But other consumer-protection laws (unconscionability doctrine, deceptive trade practices, CARD Act limits on certain fees) impose practical limits.

Does this analysis apply to closed-end loans?
No. Closed-end loans (a one-time loan with a fixed repayment schedule) have a different fee/charge analysis. The opinion is specific to open-end credit under § 6.2-312.

Where can I find the current Regulation Z?
12 C.F.R. Part 226 (now reorganized as Part 1026 under CFPB administration). Section 226.4 (now 1026.4) defines finance charge and its exclusions.

Background and statutory framework

• Va. Code § 6.2-312: open-end credit plans; finance charges (conditional on cycle-payment failure) and other charges and fees (unconditional).
• Va. Code § 6.2-100: incorporates Federal Reserve Board Regulation Z definitions for Title 6.2.
• 12 C.F.R. § 226.4: Regulation Z definition of finance charge, including exclusions.
• 12 C.F.R. § 226.4(c)(4): exclusion of participation fees.
• Federal Truth-in-Lending Act: 15 U.S.C. §§ 1601 to 1693r.

The interpretive moves:

• Plain reading of § 6.2-312 distinguishes finance charges from other charges and fees.
• Regulation Z (incorporated by Va. Code § 6.2-100) excludes participation fees from "finance charge."
• An annual membership fee, charged as a condition of access to the plan, is a participation fee and not a finance charge.
• Therefore the 25-day cycle-payment condition does not constrain the lender's authority to charge it.

Citations

• Va. Code § 6.2-100
• Va. Code § 6.2-312
• 12 C.F.R. § 226.4
• Federal Reserve Board, Official Staff Interpretations to Regulation Z, comment 4(c)(4)-1
• 15 U.S.C. §§ 1601 et seq. (Truth in Lending Act)
• Cuccinelli v. Rector & Visitors of the Univ. of Va., 230 Va. 420, 722 S.E.2d 626 (2012)
• Commonwealth v. Amerson, 281 Va. 414, 706 S.E.2d 877 (2011)
• Alger v. Commonwealth, 267 Va. 255, 590 S.E.2d 563 (2004)
• Barr v. Town & Country Props., Inc., 240 Va. 292, 396 S.E.2d 672 (1990)
• 1987-88 Op. Va. Att'y Gen. 513

Source

• Landing page: https://www.oag.state.va.us/annual-reports-opinions/official-opinions
• Original PDF: https://www.oag.state.va.us/files/Opinions/2013/13-103_Hugo.pdf

Original opinion text

COMMONWEALTH of VIRGINIA
Office of the Attorney General
Kenneth T. Cuccinelli, II
Attorney General

December 13, 2013

The Honorable Timothy D. Hugo
Member, House of Delegates
Post Office Box 893
Centreville, Virginia 20122

900 East Main Street
Richmond, Virginia 23219
804-786-2071
FAX 804-786-1991
Virginia Relay Services
800-828-1120
7-1-1

Dear Delegate Hugo:

I am responding to your request for an official advisory opinion in accordance with § 2.2-505 of the Code of Virginia.

Issue Presented

You ask whether it is permissible under Virginia law for a lender who extends open-end credit pursuant to § 6.2-312 of the Code of Virginia to charge an annual membership fee.

Response

It is my opinion that an annual membership fee is not a "finance charge," provided that such annual membership fee is assessed as a condition of access to the credit plan and regardless of whether a borrower actually receives an extension of credit from the lender. Consequently, it is my further opinion that a lender who extends open-end credit pursuant to § 6.2-312 may charge borrowers an annual membership fee in connection with the provision of open-end credit, regardless of whether the borrower repays the balance in full by the close of a minimum 25-day billing cycle.

Applicable Law and Discussion

Section 6.2-312 generally permits lenders to offer open-end credit plans to borrowers, and, in connection with such plans, to require payment of finance charges and other fees. Most relevantly, § 6.2-312(A) provides the following:

Notwithstanding any provision of this chapter other than § 6.2-327, and except as provided in subsection C, a seller or lender engaged in extending credit under an open-end credit plan may impose, on credit extended under the plan, finance charges and other charges and fees at such rates and in such amounts and manner as may be agreed upon by the creditor and the obligor, if under the plan a finance charge is imposed upon the obligor if payment in full of the unpaid balance is not received at the place designated by the creditor prior to the next billing date, which shall be at least 25 days later than the prior billing date.[1]

Based on a plain reading of the statute, § 6.2-312(A) clearly distinguishes between "finance charges" and "other charges and fees."[2] If a fee is a "finance charge," the lender may assess it only if the borrower fails to fully repay the balance in full by the close of the (minimum 25 day) billing cycle. If a fee is an "other charge[] or fee[]," a lender may assess it regardless of whether the borrower repays the balance in full by the close of the (minimum 25 day) billing cycle. In this regard, I must examine whether the annual membership fee you describe is a "finance charge," or another charge or fee contemplated by the statute.

For purposes of Title 6.2, the term "finance charge" is defined as having "the meaning assigned to it in Federal Reserve Board Regulation Z, 12 C.F.R. § 226.4, as amended."[3] Regulation Z to the federal Truth-in-Lending Act[4] generally defines "finance charge" as "the cost of consumer credit as a dollar amount. It includes any charge payable directly or indirectly by the consumer and imposed directly or indirectly by the creditor as an incident to or a condition of the extension of credit."[5] Regulation Z further specifically excludes from the definition of "finance charge" "[f]ees charged for participation in a credit plan, whether assessed on an annual or other periodic[6] basis."[7] Further instructive are the official Federal Reserve Board comments regarding participation fees:

The participation fees described in [12 C.F.R.] § 226.4(c)(4) do not necessarily have to be formal membership fees, nor are they limited to credit card plans. The provision applies to any credit plan in which payment of a fee is a condition of access to the plan itself, but it does not apply to fees imposed separately on individual closed-end transactions. The fee may be charged on a monthly, annual, or other periodic basis; a one-time, non-recurring fee imposed at the time an account is opened is not a fee that is charged on a periodic basis and may not be treated as a participation fee.[8]

The foregoing definition of, and commentary on, the term "finance charge" are clear and unambiguous. To be considered a "finance charge," a charge must be dependent on whether the borrower actually receives a loan or other extension of credit.[9] Further helpful to my understanding of the meaning of "finance charge" is the clear exclusion of periodic fees charged for the mere participation in a credit plan, as opposed to the actual receipt of one or more extensions of credit pursuant to such a credit plan.[10] The Federal Reserve Board comments further clarify that a participation fee must be charged at regular intervals on a recurring basis.[11] Accordingly, I conclude that an annual membership fee is not a finance charge, provided that it is assessed for the privilege of participation in a credit plan, and not based on the actual extension of credit to the borrower. Because an annual membership fee is not a "finance charge" under Title 6.2, I also conclude that a lender offering credit under § 6.2-312 may assess an annual membership fee regardless of whether the balance is repaid in full by the borrower prior to the close of a minimum 25-day billing cycle.

Conclusion

Accordingly, it is my opinion that an annual membership fee is not a "finance charge," provided that such annual membership fee is assessed as a condition of access to the credit plan and regardless of whether a borrower actually receives an extension of credit from the lender. Consequently, it is my further opinion that a lender who extends open-end credit pursuant to § 6.2-312 may charge borrowers an annual membership fee in connection with the provision of open-end credit, regardless of whether the borrower repays the balance in full by the close of a minimum 25-day billing cycle.

With kindest regards, I am

Very truly yours,

Kenneth T. Cuccinelli, II
Attorney General

[1] Emphasis added.

[2] "When construing a statute, our primary objective is 'to ascertain and give effect to legislative intent,' as expressed by the language used in the statute." Cuccinelli v. Rector & Visitors of the Univ. of Va., 230 Va. 420, 425, 722 S.E.2d 626, 629 (2012) (quoting Commonwealth v. Amerson, 281 Va. 414, 418, 706 S.E.2d 877, 882 (2011)) (further citation and internal quotation marks omitted). "We 'assume the legislature chose, with care, the words it used when it enacted the relevant statute.'" Alger v. Commonwealth, 267 Va. 255, 261, 590 S.E.2d 563, 556 (2004) (quoting Barr v. Town & Country Props., Inc., 240 Va. 292, 295, 396 S.E.2d 672, 674 (1990)).

[3] Va. Code Ann. § 6.2-100 (2010).

[4] The federal Truth in Lending Act is generally cited as 15 USCS §§ 1601 through 1693r (2013).

[5] 12 C.F.R. § 226.4(a) (2013) (emphasis added).

[6] The word "periodic" is not defined in Regulation Z or the Truth-in-Lending Act. Absent a statutory definition, words are given their ordinary meaning. 1987-88 Op. Va. Att'y Gen. 513, 514. Merriam-Webster's Dictionary defines "periodic" as, most relevantly, "occurring or recurring at regular intervals." Merriam-Webster's Collegiate Dictionary 862 (10th ed. 2001).

[7] 12 C.F.R. § 226.4(c)(4) (2013).

[8] 12 C.F.R. pt. 226, supp. I, § 226.4, annot. (2013) (comment 4(c)(4)(1), "Official Staff Interpretations").

[9] 12 C.F.R. § 226.4(a) (defining "finance charge").

[10] See 12 C.F.R. § 226.4(c)(4).

[11] See supra notes 6 and 8 and accompanying text.